HOLX, UNH, WLP

S&P 500: +0.73%
The S&P 500 finished higher for the fourth straight day, capping off its biggest weekly gain since November. As you can probably tell from the content of today’s posting, the healthcare sector was in focus today.


Hologic (HOLX) +11.91%
The FDA approved two of Hologic’s tests designed to detect human papillomavirus (HPV) known to cause cervical cancer. HPV, the most common sexually transmitted disease in the U.S., is recognized as the cause of most cervical cancers. Thus, doctors recommend that women of child-bearing age be screened each year for the virus.

The approval of these new tests solidifies Hologic’s already dominate position in the HPV test market. These diagnostics generate a steady revenue stream that carries a higher gross margin than the breast health division, which should help offset any potential weakness in mammography device sales.

Hologic is a diversified medical technologies company serving the women’s healthcare market. The company specializes in the screening, diagnosis and therapy of many major women’s health issues.


UnitedHealth Group (UNH) +4.65%
Shares of UnitedHealth were boosted by speculation that Humana will be acquired. (Humana is the second-largest provider of health benefits backed by the U.S. Medicare program.)

UnitedHealth has been on a tear since the company said Tuesday that they can adapt to changes from President Obama’s proposed overhaul of the American health system. As mentioned in a previous posting, UnitedHealth’s limited exposure to Medicare compared to its rivals and enormous scale should help them outperform their peers.

UnitedHealth says they can use “well-developed medical management techniques and computer technology to save money and conform to Obama’s goals.” Obama has proposed reducing payments to U.S. Medicare-backed private health plans for the elderly, which accounts for about one-fifth of UnitedHealth’s revenue and profit.

UnitedHealth also said it will benefit from being the biggest provider of managed care plans for the poor and disabled covered by the U.S. government’s Medicaid program. More than half of the $87 billion allocated to Medicaid in the fiscal stimulus package approved last month is headed for states where UnitedHealth now has contracts.


WellPoint (WLP) +2.79%
WellPoint was also helped by rumors that Humana may be acquired. Shares of WellPoint were positive for most of the week on news that they were looking to sell their pharmacy benefits management business (PBM).

WellPoint is in fact looking to outsource its PBM business, but an outright sale may not be technically accurate. It is more likely that WellPoint is looking to sell the right to service its 32 million members in its PBM business for some extended period of time, similar to the way UnitedHealth sold its PBM business to SmithKlineBeecham in 1994 and signed a long-term contract to outsource its PBM business.

WellPoint management has suggested that the catalysts for the sale are changing industry dynamics as well as the recognition that WellPoint was never going to acieve the rebate levels of the standalone competitors. Another goal is to monetize this asset. There is a good chance that proceeds would go towards an acquisition, but could also be used for buybacks, debt paydown or issuance of a special dividend to shareholders.

Express Scripts (ESRX) and Medco (MHS) are expected to be the most active bidders on this business. This event would likely be a positive for the industry since the transaction would eliminate a major competitor from the market, which would help alleviate pricing concerns.


Quick Hits

• JNJ $3 Billion Drug Duel Looms over Merck’s Reverse Merger with Schering
  
  

Peter Lazaroff, Junior Analyst